Tale of Two Personal Savings Accounts

Commentary by Pete du Pont

July 29, 2000

A funny thing happened on the way to Election Day. Both presidential candidates have proposed creating voluntary personal savings accounts to make average workers shareholders in our economy and more financially secure in their golden years.

But don't be confused, these plans differ dramatically. One is linked with Social Security reform, the other boasts that it is not. One eases the need to raise payroll taxes, the other does not. One is easy for everyone to participate, the other is not.

Texas Gov. George W. Bush has proposed the creation of personal accounts as part of his plan to save Social Security. Why would Bush link the two? Social Security is currently a pay-as-you-go system whereby taxes taken from paychecks of today's workers pay benefits of today's retirees. When Social Security was created prior to the baby boom, there were approximately 100 workers paying for the benefits of every two retirees. Following the baby boom, people began to live longer and have fewer children. Now there are only about three workers for every retiree, and it'll soon drop to about 2 to 1.

Currently, the government receives more in payroll taxes than it needs to pay benefits. But by 2015, workers' payroll taxes won't be enough to pay all Social Security benefits. That is when the trust fund, which holds special government bonds, is supposed to make up the difference. To redeem the bonds, however, the government must either raise taxes, borrow from the public, or reduce benefits.

Under the Bush proposal, workers would be allowed to invest a small portion of their payroll tax dollars in a personal account similar to an IRA. Workers would be guaranteed a minimum benefit, coming from a mixture of their personal account and a government guarantee.

Initially, this combined benefit would probably rely heavily on the government guarantee. But as workers' accounts grow, they will ease the government's burden and reduce the likelihood of a tax hike. In fact, they might be able to be cut. And, depending on how the program is eventually structured, individuals' accounts could generate a larger benefit than they would otherwise receive. These personal accounts would enable people who live paycheck to paycheck to accumulate, literally, hundreds of thousands of dollars by the time they retire.

Gore, ever the savvy campaigner, has found his own way to entice would-be investors, and he's done so without having to completely change rhetorical course in his pitch for the senior vote. His answer? Allow younger workers to invest in personal accounts that are completely separate and on top of Social Security. At least he's come around on the value of investing.

Gore's accounts, similar to a 401(K), would allow workers to set aside a portion of money, which the federal government would match on a sliding scale, costing about $200 billion over ten years. For low-income workers, Gore would chip in $3 for every $1 the worker saves. For families with an income of $60,000 or more per year, Gore would only match 33 cents on every dollar. For families earning over $100,000, there's no match.

Yet Gore would do nothing about the demographic dilemma facing Social Security. Instead, he would use current Social Security surpluses to pay down the national debt, arguing that the federal government would save huge amounts of money in future interest payments. Gore then proposes crediting the Social Security trust fund with those savings.

On paper, this would extend the life of the trust fund until approximately 2050. But since the trust fund does not represent real assets, but merely government IOUs for future tax revenues, this is essentially a meaningless exercise. Benefits will still either have to be cut, or payroll taxes will have to be raised.

How high will the payroll tax have to get to sustain Social Security? According to the NCPA's online Social Security calculator, www.mysocialsecurity.org, when the average 30 year-old worker retires, the payroll tax will have to be 27.81% just to pay for Social Security, Medicare and all other elderly health benefits. That's nearly a third of a worker's income.

Gore's plan fails to deal seriously with the financial crisis facing Social Security. And while his personal accounts are heavily tilted toward lower-income workers, there is some question as to whether or not workers living paycheck to paycheck will be able to find the extra dough to take part. This is especially a concern if they have less and less to budget with due to a rising payroll tax.

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